Ok 


1    1918 


COMBINATION,  NOT  COMPETITION 
OF  RAILROADS 


BY 


BLEWETT  LEE 


UBRARY  OF  CONGRESS  CARD  A18-808 


Reprinted  from  Michigan  Law  Review,  Vol.  XVI,  No.  7, 

May,  19 1 8 


COMBINATION,  NOT  COMPETITION,  OF  RAILROADS. 

IN  the  course  of  the  taking  of  evidence  before  what  is  generally 
called  the  Newlands  Committee,  appointed  by  Congress  to  in- 
vestigate conditions  relating  to  interstate  and  foreign  commerce, 
it  was  very  interesting  to  observe  the  personality  of  the  different 
members  of  the  Committee,  as  indicated  by  the  questions  which 
they  asked  of  the  various  expert  witnesses  who  were  brought  be- 
fore them.  The  keen  intellect  of  the  Senior  Senator  from  Iowa  has 
continually  played  about  the  problem,  how  the  revenues  of  the  weak 
lines  can  be  increased  without  at  the  same  time  increasing  those  of 
the  strong  ones.  Assuming  that  some  of  the  lines  are  already  earn- 
ing enough,  but  some  are  not,  how  shall  the  poor  lines  be  made  pros- 
perous without  increasing  the  earnings  of  their  strong  competitors? 
Shall  the  Government  guarantee  the  earnings  of  the  weak  lines  ?  If 
so,  how  will  it  ever  get  its  money  back  ?  Can  the  strong  lines  be  made 
to  shoulder  the  weak  ones,  so  to  speak,  or  dilute  their  own  pros- 
perity by  spreading  it  over  the  adversity  of  their  weaker  brethren? 
On  more  than  one  occasion  the  Senator  has  declared  this  problem 
to  be  insoluble.    What  is  to  be  done? 

It  may  be  remarked  at  the  outset  that  the  idea  that  the  earnings 
of  the  strong  lines  must  be  kept  down  at  all  events,  is  far  from  com- 
forting to  people  who  have  invested  their  money  in  the  railroad 
business,  and  most  discouraging  to  those  who  are  invited  to  invest 
new  money  in  it. 

In  one  of  the  recent  Treasury  Decisions,  Honorable  David  A. 
Gates  had  occasion  to  remark  that  unless  a  public  utility  like  a  rail- 
road company  earned  eight  per  cent-  upon  its  investment,  its  stock 
could  not  be  kept  at  par — a  conclusion  which  was  reached  from  an 
examination  of  many  income  tax  schedules.  In  an  investigation 
made  in  connection  with  the  Fifteen  Per  Cent.  Rate  Case,  the  Illinois 
Central  Railroad  Company  discovered  that  in  the  unusually  pros- 
perous year  ending  June  30,  1916,  it  had  in  fact  received  a  return 
on  its  investment  in  road  and  equipment  of  only  4.3%.  The  opin- 
ion of  the  Interstate  Commerce  Commission  in  this  case  shows 
that,  taking  the  railroads  of  the  country  as  a  whole,  the  return  for 
this  same  most  prosperous  year  for  the  carriers  in  the  Eastern  Dis- 
trict was  6.64%,  Southern  District  5.26%,  and  the  Western  District 
5.43%  The  net  operating  income  for  19 16  is  the  largest  which  the 
railroads  have  ever  had,  and  was  more  than  $1,000,000,000.00,  but  it 
was  less  than  6%  upon  the  value  of  the  railroad  property  devoted  to 


..  «-•  <••  'W 


—    2    

the  use  of  the  public.     The  increased  operating  expenses  for  19 17 
have  caused  a  very  considerable  recession  since  that  time. 

During  the  year  19 16,  not  a  single  share  of  new  railroad  stock 
was  listed  on  the  New  York  stock  exchange,  or  sold  to  the  public, 
for  new  railroad  building.  It  is  generally  agreed  that  at  least  one 
billion  dollars  each  year  ought  to  be  spent  in  increasing  the  railroad 
facilities  in  the  United  States.  This  sum  has  to  be  borrowed  from 
investors,  and,  under  the  circumstances,  they  can  hardly  be  blamed 
for  putting  their  money  into  something  else,  and  this  is,  in  fact, 
what  they  are  doing.  The  transactions  of  the  New  York  Stock  Ex- 
change indicate  that  practically  no  new  railroad  securities  are  being 
bought,  and  that  such  financing  as  railroads  have  done  recently  is  of 
a  purely  temporary  character  by  the  issue  of  short  term  notes. 

Even  if  a  scheme  could  be  invented  by  which  the  earnings  of  the 
proud  might  be  humbled,  and  the  earnings  of  those  of  low  degree 
raised  up  in  the  railroad  world,  it  would  be  very  ill  advised  to  put 
it  into  effect  at  a  time  when  the  railroads  of  the  country  are  not  ade- 
uate  to    furnish   the   transportation    facilities    needed   by   business. 
Additional  sums  will  have  to  be  borrowed  in  order  to  make  the  rail- 
roads adequate  to  serve  the  business  of  the  country.     Congress  has 
by  its  laws  created  a  situation  where  the  rates  charged  must  be  the 
same  over  all  competing  lines,  for  if  they  are  different  the  line  with 
the  low  rate  will  get  all  the  business.    Since  the  rates  are  published, 
other  lines  have  no  difficulty  in  immediately  making  the  same  rate. 
Under  these  circumstances,  the  only  competition  possible  is  in  con- 
venience of  facilities  and  in  quality  of  service.  This  sort  of  competi- 
tion, however,  is  very  limited  for  the  reason  that  the  older  lines  first 
on  the  ground  have  obtained  facilities  which  the  younger  lines  can 
never  possibly  hope  to  duplicate,  and  they  have  reached  a  financial 
status  which  is  likely  always  to  keep  them  at  the  front,  so  far  as 
quality  of  service  is  concerned.     It  ought  also  to  be  remarked  that 
this  competition  at  competitive  points  in  very  special  facilities  and 
expedited    service  is  really  to  the  disadvantage  of  the  non-competitive 
points.     The  town  upon  only  one  railroad  is  tied  to  the  disadvan- 
tage of  having  but  one  railroad  instead  of  more,  and  if,  at  a  com- 
petitive point,  the  facilities  are  multiplied  and  services  expedited  on 
account  of  competition,  obviously  the  advantage  in   favor  of  the 
competitive  point  is  made  greater  than  ever.  The  policy  of  the  coun- 
try ought  not  to  be  to  increase  the  lead  of  the  strong  towns  over  the 
weak  ones. 

A  natural  and  wholesome  economic  process  which  would  be  to  the 
advantage  of  the  people  of  the  whole  country  has  been  balked  and 
practically  brought  to  an  end  by  the  application  to  the  railroads  of 


what  is  popularly  known  as  the  Sherman  Act,  and  by  the  anti-trust 
laws  of  the  several  States.  These  statutes  were  passed  upon  the 
idea  that  the  principles  of  competition  applicable  to  business  gener- 
ally, govern  also  in  the  case  of  railroads,  wholly  overlooking  the  es- 
sentially monopolistic  character  of  the  railroad  business.  One  read- 
ily recognizes  that  the  way-stations  each  upon  only  one  railroad 
have  to  do  business  with  a  monopoly.  Even  at  competitive  points, 
the  railroads  are  still  monopolistic,  and  whenever  they  are  compelled 
by  law  to  do  business  anywhere  upon  the  same  terms,  the  situation 
of  monopoly  becomes  almost  as  complete  there  as  at  the  way-sta- 
tions. The  statutes  which  compel  railroad  companies  to  publish 
their  rates  and  practices,  and  everything  which  they  do  for  the  ben- 
efit of  the  shippers,  by  compelling  railroads  to  do  business  upon  the 
very  same  terms,  have  put  the  shipping  public  everywhere  in  the  sit- 
uation that  they  are  dealing  with  a  monopoly.  Under  these  circum- 
stances the  American  people  have  been  intelligent  to  substitute  reg- 
ulation instead  of  competition.  Rates  and  facilities  are  now  sub- 
jected to  the  control  of  the  Interstate  Commerce  Commission  and 
the  various  State  Commissions.  Notwithstanding  this,  however, 
the  statutes  which  were  framed  on  the  idea  of  forcing  the  railroads 
to  compete,  and  which  prevent  acquisition  of  the  weak  lines  by  the 
strong  ones,  especially  if  they  should  be  parallel  or  competing,  are 
still  on  the  statute  books  and  actually  compel  the  weak  lines  to  re- 
main indefinitely  incapable  of  earning  money  for  their  owners  or 
giving  adequate  service  to  the  public. 

Is  there  any  way  to  make  the  weak  lines  strong?  Yes,  a  very  sim- 
ple one.  Let  the  strong  lines  buy  the  weak  ones,  and  in  this  way 
only  the  strong  lines  would  be  left.  This  is  the  situation  which  al- 
ready exists  in  France,  and  is  rapidly  coming  to  pass  in  England. 
Undoubtedly  the  strong  lines  which  have  already  control  of  great 
traffic  by  using  the  weaker  lines  for  feeders  and  cut-offs,  can  make 
more  money  out  of  them  than  anyone  else,  and  the  country  will  be 
better  served  by  having  the  railroads  in  strong  hands  than  in  hands 
which  are  financially  feeble  and  unable  to  develop  the  country. 
Wherever  it  has  not  been  interfered  with,  the  process  of  consolida- 
tion of  weak  lines  into  strong  ones  has  gone  on  and  has,  on  the 
whole,  been  of  great  benefit  to  the  public,  but  this  movement  also 
has  practically  come  to  a  stop  in  the  United  States.  Statutes  block 
the  way. 

The  situation  in  France  is  in  some  respects  a  very  interesting  one. 
The  following  quotation  is  taken  from  the  "Historical  Sketch  of 
Government  Ownership  of  Railroads  in  Foreign  Countries"  by  the 


distinguished  English  expert  on  railroads,  W.  M.  Acworth,  present- 
ed to  the  Joint  Committee  of  Congress  on  Interstate  Commerce.1 

"On  ist  January,  1909,  the  Government  by  taking  over  one 
of  the  six  great  systems — the  Western — upset  the  symmetry 
of  the  original  plan.  But  with  this  exception,  throughout  the 
whole  history  the  original  plan  has  stood  firm.  The  whole 
country  was  divided  up  among  six  great  companies,  five  of 
which  radiate  from  Paris,  and  the  sixth,  the  Midi,  serves  the 
extreme  South  and  Southwest.  The  development  of  the  rail- 
way net  work  has  been  systematic  from  the  outset;  trunk 
lines  first,  then  important  branches,  then  the  less  important 
ones,  and  finally  in  recent  years  a  considerable  development 
of  light  secondary  lines.  Throughout,  the  State  has  guided, 
subsidized  and  controlled.  Each  company  has  a  monopoly  of 
its  own  district.  So  far  as  possible,  the  points  where  the  great 
systems  meet  are  arranged, — not,  as  in  Holland,  or  formerly 
in  Italy,  at  the  great  towns — but  precisely  at  the  points  of 
least  importance  from  a  traffic  standpoint.  Where  traffic  is 
unavoidably  competitive,  as  for  instance  from  Paris  to  Cen- 
tral Switzerland,  which  can  be  reached  either  by  the  Eastern 
or  by  the  Paris  and  Lyons  railway,  arrangements  are  delib- 
erately made  to  prevent  competition.  The  Government  con- 
trols all  rates  and  fares  charged  and  all  services  given,  and 
the  Government  approves,  not  merely  of  pools,  but  of  agree- 
ments by  which  shippers  attempting  to  consign  traffic  by  the 
route  by  which  railway  companies  have  agreed  the  traffic  shall 
not  flow,  are  deliberately  penalized  by  higher  rates." 

Under  this  arrangement,  as  Mr.  Acworth  points  out,2  down  to  the 
time  the  State  took  over  the  Western  Railway  of  France  in  1909,  the 
French  companies  had  an  operating  ratio  seven  or  eight  per  cent, 
lower  than  that  of  the  Prussian  State  Railways,  which  have  been 
regarded  as  models  of  successful  government  ownership. 

In  the  January,  1917,  number  of  the  Edinburgh  Review  appears 
an  article  on  the  future  of  railways  in  England,  in  which  the  author 
evidently  a  very  competent  critic,  concludes  that,  having  seen  the 
advantages  of  the  system  of  operation  since  the  beginning  of  the 
present  war,  by  which  all  competition  is  ended,  England  is  unlikely 
ever  to  return  to  a  competitive  situation,  so  far  as  the  railways  are 
concerned.  The  plan  which  prevails  in  France  of  having  all  the  rail- 

1  Page  19. 
J  Pace  35. 


—  5  — 

roads  in  a  particular  section  combine,  so  as  to  operate  upon  the  most 
economical  basis,  is  recommended.  The  author  is  opposed  to  Gov- 
ernment ownership,  because  the  railroads  would  corrupt  politics, 
and  politics  would  corrupt  the  railroads.  He  calls  attention  to  the 
classical  instance  of  Belgium  in  June,  1912,  when,  in  order  to  carry 
an  election,  the  Minister  of  Railways,  the  day  before  the  election 
occurred,  raised  the  salaries  of  certain  classes  of  railway  workers 
for  six  months  back,  and  paid  the  money  that  very  day.  Before  this 
took  place,  the  election  had  been  doubtful,  but  the  next  day  the  Min- 
istry was  triumphantly  returned  to  power.  The  author  also  recom- 
mends that  the  Government  should  by  purchase  become  a  stockhold- 
er in  all  the  railways  to  such  an  extent  as  to  secure  representation 
upon  the  Boards  of  Directors. 

The  following  statement  is  quoted  fom  Sir  Herbert  Walker, 
Chairman  of  the  British  Railway  Executive  Committee  :3 

"I  cannot  think  that  our  railways  will  ever  revert  to  the  in- 
dependent and  foolish  competitive  system  which  obtained  be- 
fore this  war  broke  out.  The  old  system  possessed  manifold 
evils,  not  the  least  being  the  wastefulness  of  competition ;  the 
lack  of  standardization;  the  thousand  and  one  intricate  and 
time-engaging  processes  necessary  on  each  line  owing  to  riv- 
alry with  others  in  ways  that  never  ought  to  have  been  al- 
lowed. If  we  are  to  get  the  really  useful  and  tangible  result 
of  what  has  been  done  in  the  war — if  we  are  to  prove  that 
the  experience  gained  has  been  beneficial — there  must  be 
vastly  more  co-ordination  between  the  various  lines  and 
companies.  Overlapping  must  cease,  and  waste  of  material, 
stock,  man  power  and  energy  must  be  done  away  with." 

An  interesting  phase  of  the  recent  situation  in  England  is  that 
communities  are  required  to  be  served  with  coal  from  the  nearest 
available  mines,  and  in  this  way  long  hauls  upon  coal  traffic  are 
avoided  and  a  great  saving  is  made  in  the  amount  and  consequent 
expense  of  transportation.  Obviously,  under  the  existing  laws  our 
railroad  companies  would  have  had  no  way  of  preventing  cross- 
hauls,  at  least  prior  to  the  taking  over  of  the  railroads  by  the  Presi- 
dent under  the  War  Power,  however  beneficent  and  economical.  It 
is  said  that  upon  the  New  York,  New  Haven  &  Hartford  Railroad 
sometimes  a  train  of  bananas  from  New  York  bound  for  Boston 
has  met  a  train  of  bananas  moving  from  Boston  to  New  York.  This 
means  only  that  the  New  York  broker  has  found  Boston  customers, 

3  Railway  Review,  August  4,  1917,  p.  150. 


—  6  — 

and  the  Boston  broker  has  found  New  York  customers,  but  the  re- 
sult is  a  pure  waste  of  transportation.  From  the  point  of  view  of 
the  railroads,  this  transportation  is  not  wasted  since  it  is  all  paid  for, 
but  from  the  point  of  view  of  the  country  there  should  be  as  little 
of  it  as  possible.  A  similar  waste  arises  when  freight  is  hauled  over 
a  round-about  route,  instead  of  a  direct  one.  Under  existing  laws, 
however,  the  railroads  could  not  by  agreement  prevent  this,  even 
if  so  disposed.  Under  an  amendment  to  the  Interstate  Commerce 
Act,  the  shipper  also  has  the  right  to  route  the  freight,  and  it  is  the 
duty  of  the  railroads  to  obey  his  directions.4 

It  has  turned  out  very  unfortunate  now  that  the  railroads  are 
fully  regulated,  that  the  prohibitions  against  the  pooling  of  traffic 
still  remain.  The  pooling  of  equipment  has  been  found  by  actual 
experience  to  be  economical  and  in  the  public  interest ;  the  pooling 
of  passenger  train  service  would  undoubtedly  lead  to  the  public  be- 
ing much  more  conveniently  served  at  a  considerable  reduction  in 
expense ;  while  the  pooling  of  freight  traffic  could  be  made  a  great 
economy  by  sending  freight  over  the  cheapest  lines.  Pooling  of  any 
kind  should  be  under  Governmental  supervision,  but  there  is  no  lif- 
ficulty  whatever  in  fully  protecting  the  public  interest  by  the  various 
regulating  bodies.  Economies  of  this  kind  are  almost  entirely  for- 
bidden by  the  anti-trust  laws  of  today.  As  we  shall  see  later,  the 
operation  of  all  the  railroads  in  the  country  by  the  Railroad  War 
Board  as  if  they  were  one  continental  system,  demonstrated  that  the 
public  has  really  everything  to  gain  and  nothing  to  lose  by  such  an 
arrangement.  Under  normal  conditions  the  great  systems  natural1  y 
prefer  that  pooling  should  be  prohibited,  for  it  protects  them  against 
the  construction  of  new  lines,  built  to  share  in  the  pools. 

Section  5  of  the  Interstate  Commerce  Act5  prohibits  railroads 
pooling  freights  or  earnings.  It  has  proved  entirely  adequate.  Sec- 
tion 11  of  the  Clayton  Act0  confers  upon  the  Interstate  Commerce 
Commission  authority  to  enforce  compliance  with  sections  2,  3.  7 
and  8  of  that  Statute.  Of  these  sections,  section  7  is  the  one  which 
provides  in  regard  to  the  acquisition  by  one  corporation  of  the  stock 
of  another.  This  jurisdiction  of  the  Commission  is  concurrent,  how- 
ever, with  that  of  the  District  Courts  of  the  United  States,  (Section 
15),  so  that  the  new  legislation  is  only  partly  constructive.  Indeed, 
the  chief  present  restriction  upon  the  acquisition  on  the  stock  of  one 
railroad  by  another  will  be  found  in  this  Section  7  of  the  Clayton 

*  Sec.    ii.   Par.   4:   U.   S.   Comp.    Stat.   Ann.    (igiGl.    §   8=183    CO. 
s  U.  S.  Comp.  Stat.  Ann.   (1916),  §  8567. 
9  lb.   8S35J;   38  Stat.   734. 


—  7  — 

Act  of  October  15,  1914,  c.  323,  the  act  entitled,  "An  Act  to  Supple- 
ment an  Act  to  protect  trade  and  commerce  against  unlawful  re- 
straints and  monopolies,"  by  which  the  distinction  is  made  to  turn 
upon  whether  or  not  the  acquisition  by  one  railroad  company  of  the 
stock  of  another  may  be  substantially  to  lessen  competition  between 
the  corporation  whose  stock  is  so  acquired  and  the  corporation  mak- 
ing the  acquisition.  Under  the  words  "may  be"  and  "substantially" 
practically  every  case  would  go  to  a  jury,  and  since,  under  Section 
14,  a  violation  of  the  Act  on  the  part  of  any  individual  directors,  of- 
ficers or  agents  of  such  corporation,  carries  with  it  a  fine  of  not  to 
exceed  $5,000.00  or  imprisonment  not  to  exceed  one  year,  or  both, 
no  one  cares  to  undergo  the  risk  of  buying  another  railroad,  since 
how  to  predict  what  a  jury  will  do  under  the  circumstances  is  one 
of  those  things  which,  as  remarked  by  Lord  Dundreary,  "No  fellow 
ever  can  find  out."  In  short,  it  is  perfectly  safe  for  a  railroad  com- 
pany never  to  buy  any  other  railroad,  and  it  is  more  or  less  danger- 
ous for  any  railroad  company  to  buy  another  railroad,  a  state  of  af- 
fairs which  dooms  the  country  indefinitely  to  being  badly  served  by 
weak  and  insignificant  lines,  which  can  never  really  render  adequate 
service,  unless  they  fall  into  strong  hands.  The  purchase  of  a  rail- 
road will  turn  upon  such  questions  as  whether  or  not  the  Attorney 
General  wants  to  run  for  Governor.  The  obvious  remedy  for  the  sit- 
uation is  to  have  the  decision  of  the  Interstate  Commerce  Com- 
mission made  conclusive  of  the  legality  of  each  proposed  purchase, 
for  their  fidelity  to  the  public  interest  admits  of  no  question,  and 
their  competence  can  hardly  be  challenged. 

The  leading  cases  holding  that  the  Sherman  Anti-Trust  Law  of 
July  2,  1890,  applied  to  railroad  companies,  were: 

Trans-Missouri  Freight  Association  Cases,  (1897),  166  U.  S.  290. 
Joint  Traffic  Association  Cases,  (1898),  171  U.  S.  505. 

In  the  first  case  the  decision  was  rendered  by  a  bare  majority  of 
the  court,  in  the  face  of  a  very  vigorous  dissent.  In  the  second  case, 
the  decision  was  rendered  by  five  judges,  three  dissenting,  and  one 
taking  no  part  in  the  decision  of  the  case.  If  the  cases  had  come  be- 
fore the  court  for  the  first  time  at  the  present  day,  when  the  pow- 
ers of  the  Interstate  Commerce  Commission  over  the  railroad  com- 
panies have  been  so  greatly  increased,  and  especially  since  the  power 
to  make  rates  and  to  compel  the  furnishing  of  certain  facilities,  has 
been  given  to  that  body,  the  decision  might  very  well  have  been  dif- 
ferent. It  it  had  been,  the  task  of  effective  railroad  regulation 
would  have  been  greatly  simplified. 


—  8  — 

Under  the  new  State  Public  Utility  Acts,  the  very  reasonable  idea 
that  where  everything  is  regulated  by  the  State,  competition  ceases 
to  be  controlling  in  importance,  is  beginning  to  make  its  way. 

The  Supreme  Court  of  Illinois,  in  the  case  of  State  Public  Utili- 
ties Commission  v.  Romberg,  114  N.  E.  191,  P.  U.  R.  1917  B  355, 
275  111.  432  (1916),  recently  held  that  under  Section  27  of  the  Illi- 
nois Public  Utilities  Act,  (Hurd's  Stat.  1916,  p.  2027)  a  public  util- 
ity, upon  obtaining  the  consent  and  approval  of  the  Commission,  has 
the  right  to  obtain  control  of  a  competing  public  utility  through  the 
purchase  of  stock,  bonds  and  other  evidences  of  indebtedness. 

In  Ex  parte  City  of  Birmingham,  (1917),  74  So.  51,  the  Supreme 
Court  of  Alabama  held  that  the  act  of  the  Public  Service  Commis- 
sion of  that  State,  in  assenting  to  a  transfer  of  the  franchise  of  a 
street  railway,  although  it  effected  a  consolidation  of  parallel  and 
competing  lines,  is  not  in  violation  of  Section  103  of  the  Alabama 
Constitution  which  requires  that  the  Legislature  provide  by  law  for 
the  regulation,  prohibition  or  reasonable  restraint  of  common  car- 
riers *  *  *  trusts,  monopolies,  to  prevent  them  from  making 
scarce  articles  of  necessity,  etc.,  or  prevent  reasonable  competition. 
At  page  55  of  the  report,  the  Court  says : 

"We  take  it  that  the  reasonableness  of  the  competition 
which  the  Constitution  intends  to  conserve  depends  on  its  ef- 
fect upon  the  public  interests,  whether  or  not  it  makes  rea- 
sonable the  cost  of  the  commodity  furnished  to  the  consum- 
er. Competition  in  some  circumstances  may  amount  to 
needless  economic  waste  in  the  duplication  of  investments 
and  the  cost  of  operation  for  which  in  the  end  the  consuming 
public  must  pay.  Hence  a  general  drift  of  public  opinion 
and  legislative  practice,  consonant  with  the  language  and 
purpose  of  section  103,  towards  the  supplanting  of  competi- 
tion by  the  regulation  of  rates." 

In  the  case  of  Cumberland  Telephone  cr  Telegraph  Company  v. 
State,  (1911),  99  Miss.  1,  54  So.  446,  the  Supreme  Court  of  Missis- 
sippi held  that  in  those  matters  which  are  directly  and  specifically 
dealt  with  by  the  laws  relating  to  public  utilities,  subjecting  them  to 
the  supervision  of  the  Railroad  Commission,  the  anti-trust  laws  of 
the  State  have  no  application ;  a  simple,  straight-forward  solution 
of  a  problem  which,  when  solved  in  any  other  way,  has  resulted  in 
much  confusion  and  obscurity. 

Even  in  the  halls  of  Congess,  where  the  Sherman  Act  has  been 
the  Ark  of  the  Covenant,  the  evidence  of  a  more  intelligent  appre- 
ciation of  the  real  situation  is  not  lacking. 


—  9  — 

In  The  Shipping  &  Navigation  Act  of  September  7,   1916,  it  is 
provided  by  Section  15,  as  follows: 

"That  every  common  carrier  by  water,  or  other  person 
subject  to  this  Act,  shall  file  immediately  with  the  board  a 
true  copy,  or,  if  oral,  a  true  and  complete  memorandum,  of 
every  agreement  with  another  such  carrier  or  other  person 
subject  to  this  Act,  or  modification  or  cancellation  thereof,  to 
which  it  may  be  a  party  or  conform  in  whole  or  in  part,  fix- 
ing or  regulating  transportation,  rates  or  fares ;  giving  or  re- 
ceiving special  rates,  accommodations,  or  other  special  privi- 
leges or  advantages ;  controlling,  regulating,  preventing,  or 
destroying  competition ;  pooling  or  apportioning  earnings, 
losses,  or  traffic;  allotting  ports  or  restricting  or  otherwise 
regulating  the  number  and  character  of  sailings  between 
ports ;  limiting  or  regulating  in  any  way  the  volume  or  char- 
acter of  freight  or  passenger  traffic  to  be  carried ;  or  in  any 
manner  providing  for  an  exclusive,  preferential,  or  co-opera- 
tive working  arrangement.  The  term  'agreement'  in  this  sec- 
tion includes  understandings,  conferences,  and  other  ar- 
rangements. 

The  board  may  by  order  disapprove,  cancel,  or  modify  any 
agreement,  or  any  modification  or  cancellation  thereof, 
whether  or  not  previously  approved  by  it,  that  it  finds  to  be 
unjustly  discriminatory  or  unfair  as  between  carriers,  ship- 
pers, exporters,  importers,  or  ports,  or  between  exporters 
from  the  United  States  and  their  foreign  competitors,  or  to 
operate  to  the  detriment  of  the  commerce  of  the  United 
States,  or  to  be  in  violation  of  this  Act,  and  shall  approve  all 
other  agreements,  modifications,  or  cancellations. 

Agreements  existing  at  the  time  of  the  organization  of  the 
board  shall  be  lawful  until  disapproval  by  the  board.  It 
shall  be  unlawful  to  carry  out  any  agreement  or  any  portion 
thereof  disapproved  by  the  board. 

All  agreements,  modifications,  or  cancellations  made  after 
the  organization  of  the  board  shall  be  lawful  only  when  and 
as  long  as  approved  by  the  board,  and  before  approval  or 
after  disapproval  it  shall  be  unlawful  to  carry  out  in  whole 
or  in  part,  directly  or  indirectly,  any  such  agreement,  modi- 
fication or  cancellation. 

Every  agreement,  modification,  or  cancellation  lawful  un- 
der this  section  shall  be  excepted  from  the  provisions  of  the 
Act  approved  July  second,  eighteen  hundred  and  ninety,  en- 
titled 'An  Act  to  protect  trade  and  commerce  against  unlaw- 


—    10  — 

ful  restraints  and  monopolies,'  and  amendments  and  Acts 
supplementary  thereto,  and  the  provisions  of  sections  seven- 
ty-three to  seventy-seven,  both  inclusive,  of  the  Act  approved 
August  twenty-seventh,  eighteen  hundred  and  ninety- four, 
entitled  'An  Act  to  reduce  taxation,  to  provide  revenue  for 
the  Government,  and  for  other  purposes,'  and  amendments 
and  Acts  supplementary  thereto. 

Whoever  violates  any  provision  of  this  section  shall  be 
liable  to  a  penalty  of  $1,000  for  each  day  such  violation  con- 
tinues, to  be  recovered  by  the  United  States  in  a  civil  action." 

This  is  constructive  legislation  based  upon  business  experience 
and  I  venture  to  think  it  will  be  found  ample  for  the  protection  of 
the  public. 

The  great  democracies  of  Australia  and  Canada,  indeed  the 
"crowned  republic"  of  England,  have  distanced  us  in  their  legisla- 
tion upon  the  subject  of  railroad  regulation. 

In  the  Interstate  Commission  Act,  1912,  of  the  Commonwealth 
of  Australia,  instead  of  our  extraordinary  muddle  of  Federal  and 
State  authorities  in  conflict,  we  find  the  Interstate  Commission  is 
given  judicial  power  as  a  Court  of  Record,  as  follows: 

"The  Commission  shall  have  jurisdiction  to  hear  and  de- 
termine any  complaint,  dispute,  or  question,  and  to  adjudi- 
cate upon  any  matter  arising  as  to  — (a)  any  preference,  ad- 
vantage, prejudice,  disadvantage,  or  discrimination  given  or 
made  by  any  State  or  by  any  State  Authority  or  by  any  com- 
mon carrier  in  contravention  of  this  Act,  or  of  the  provi- 
sions of  the  Constitution  relating  to  trade  and  commerce  or 
any  law  made  thereunder;  (b)  the  justice  or  reasonableness 
of  any  rate  in  respect  of  interstate  commerce,  or  affecting 
such  commerce:  (c)  anything  done  or  omitted  to  be  done  by 
any  State  or  by  any  State  Authority  or  by  any  common  car- 
rier or  by  any  person  in  contravention  of  this  Act,  or  of  the 
provisions  of  the  constitution  relating  to  trade  or  commerce 
or  any  law  made  thereunder."7 

The  provisions  of  the  Australian  Interstate  Commission  Act, 
1912,  will  be  found  at  page  756  of  the  work  just  cited.  Section  19 — 
( 1 )  is  as  follows  : 

"It  shall  not  be  lawful  for  any  State,  or  for  any  State  Rail- 
way Authority,  to  give  or  make  upon  any  railway  the  property 

'Trust   Laws   &   Unfair   Competition,   Washington   Gov.    Printing   Office,    1016,   p.    248. 


II  — 


of  the  State,  in  respect  of  inter-state  commerce,  or  so  as  to 
affect  such  commerce,  and  preference  or  discrimination  which 
is  undue  and  unreasonable,  or  unjust  to  any  State."8 

Section  27  reads  as  follows : 

"The  Commission  may  of  its  own  motion  summon  before 
it  any  State  authority,  common  carrier,  or  person  whom  it 
has  reason  to  believe  has  done  anything  or  left  anything  un- 
done in  contravention  of  this  Act,  or  of  the  provisions  of  the 
Constitution  relating  to  trade  and  commerce  or  any  law  made 
thereunder,  and  shall  have  jurisdiction  to  hear  and  determine 
the  matter  and  may  make  such  orders  in  relation  thereto  as 
if  complaint  had  been  made  to  it  of  the  contravention. ",J 

Turning  to  the  subject  of  railroad  combinations  in  Canada,  under 
the  Railway  Act  of  1903,  (3  Edward  VII,  chap.  58),  the  purchasing 
or  leasing  of  railways  must  be  approved  by  the  Governor  General, 
(sec.  281  ).10 

In  England,  combinations  between  railroad  companies  must  re- 
ceive the  approval  of  the  court  of  the  Railway  and  Canal  Commis- 
sion.11 

The  outbreak  of  the  war  with  Germany  created  an  appreciation 
of  the  necessity  of  an  increased  efficiency  if  the  railroads  of  the 
counry  would  handle  its  business  at  all.  August  10,  19 17,  Congress 
passed  an  Act  to  amend  the  Act  to  regulate  commerce,  as  amended, 
and  for  other  purposes,  by  which  the  President  was  authorized,  if 
he  found  it  necessary  for  the  National  defense  and  security,  to  di- 
rect that  such  traffic  or  such  shipments  of  commodities  as,  in  his 
judgment,  might  be  essential  to  the  national  defense  and  security, 
have  preference  or  priority  in  transportation  by  any  common  car- 
rier, and  he  was  allowed  to  act  through  such  person  or  persons  as 
he  might  designate  for  the  purpose,  or  through  the  Interstate  Com- 
merce Commission,  disobedience  of  orders  being  punishable  by  a 
fine  of  not  more  than  $5,000.00  or  imprisonment  for  not  more  than 
one  year,  or  both,  in  the  discretion  of  the  court,  carriers  complying 
with  such  order  or  direction  for  preference  or  priority  being  exempt 
from  all  liabilities  in  so  doing. 

Even  before  this  Act  became  effective,  the  railroads  of  the  coun- 
try had  voluntarily  established  the  Railroads'  War  Board  of  five 
men,  of  which  Mr.  Fairfax  Harrison,  President  of  the   Southern 


8  Paes     7fin. 

3  Page   761. 

11  Trust  Laws  &  Unfair  Competition,  p.   242. 

11  Trust  Laws  &  Unfair  Competition,  p.  238. 


—    12    — 

Railway  Company,  was  Chairman,  and  had  begun  to  operate  the 
railroads  of  the  country  as  if  they  were  one  system,  so  far  as  carry- 
ing freight  was  concerned.  The  result  of  this  arrangement  was  an 
enormous  increase  in  the  freight  carrying  record  of  American  rail- 
roads. With  an  increase  of  only  y2  of  i%  of  locomotives  in  service, 
and  of  only  1.6%  of  the  number  of  freight  cars,  over  16%  more 
freight  was  handled  in  May,  1917,  than  in  May,  1916.  Preference 
was  at  once  given  to  the  movement  of  coal  and  iron  ore.  An  agree- 
ment by  which  all  shippers  of  tidewater  coal  pooled  their  coal  at  the 
ports  of  New  York,  Philadelphia,  Baltimore  and  Hampton  Roads, 
resulted  in  a  saving,  it  is  estimated,  of  133,000  freight  cars.  A  sim- 
ilar arrangement  was  made  effective  at  ports  on  the  Great  Lakes. 
By  one  order  36  American  railroads  were  required  to  move  imme- 
diately 68,815  empty  freight  cars  to  the  lines  of  54  other  railroads. 

One  of  the  first  official  acts  after  the  enactment  of  the  Preference 
Act,  just  referred  to,  ordered  preference  in  the  movement  of  coal 
to  the  Northwest,  in  order  to  make  sure  that  that  section  of  the 
country  would  be  sufficiently  supplied  for  the  coming  winter. 

Another  interesting  development  of  the  operation  of  the  railroads 
as  a  continental  system  was  the  arrangement  by  which  export  traffic 
was  diverted  from  congested  ports  on  the  North  Atlantic  to  the 
South  Atlantic  and  Gulf  ports.  Here  we  have  a  result  of  the  great- 
est value  which  could  not  be  obtainel  at  all  in  times  of  peace.  When 
we  bear  in  mind  that  there  are  693  railroads  in  this  country,  and 
that  they  voluntarily  merged  their  activities  for  the  period  of  the 
war  by  uniting  into  one  continental  system,  one  is  filled  with  ad- 
miration of  the  business  sagacity  and  patriotism  which  made  such  a 
solution  possible.  During  the  first  four  months  of  the  Railroads' 
War  Board,  car  shortage  was  reduced  70%  ;  by  the  elimination  of 
passenger  trains  not  essential  to  the  most  pressing  needs  of  the 
country,  approximately  20,000,000  miles  of  train  service  per  year 
were  saved  and  the  reduction  of  passenger  service  released  hun- 
dreds of  locomotives  and  train  crews  and  cleared  thousands  of  miles 
of  track  needed  for  the  transportation  of  necessaries.  Empty  cars 
were  moved  from  one  railroad  to  another,  irrespectice  of  owner- 
ship; the  movement  of  grain  for  export  was  regulated  so  as  to  avoid 
delays  and  blocking  of  facilities  at  grain  elevators  and  seaports;  in- 
deed the  enormously  increased  traffic  due  to  the  war  was  handled 
with  a  skill  and  success  never  before  approximated  in  the  work  of 
the  railroads  of  the  country. 

One  of  the  most  interesting  results  of  the  operation  of  the  rail- 
roads as  a  unit  was  the  reduction  of  what  is  known  as  "car  short- 


—  13  — 

age."  The  net  shortage  of  all  the  roads  May  ist,  19 17,  was  148,627 
cars,  but  by  July  ist,  it  had  fallen  to  105,782  cars,  and  by  August  ist 
t0  33'776  cars.  By  car  shortage  is  meant  the  excess  of  unfilled  car 
requisitions,  and  it  is  unfortunately  true  that  a  shipper  will  fre- 
quently make  requisitions  for  more  cars  than  he  could  possibly  use ; 
sometimes  he  will  make  requisitions  for  the  same  cars  from  several 
different  railroads  at  the  same  time.  These  figures,  nevertheless  ar- 
gue the  most  efficient  railroading  the  United  States  had  ever  had, 
and  the  result  is  all  the  more  astounding  when  it  was  made  effective 
in  the  face  of  from  15  to  20  per  cent,  more  traffic  than  was  handled 
the  previous  year  at  the  same  time,  when  in  fact  there  were  less 
cars  to  be  used  for  handling  it.  The  railroads  of  the  country  had 
on  June  30,  1916,  29,299  less  freight  cars  than  on  June  30,  1915,  and 
1,237  less  locomotives,  and  it  is  probable  that  in  the  following  year 
there  was  a  still  further  decrease.  The  pledge  made  by  the  highest 
railroad  officers  was : 

"with  the  government  of  the  United  States,  and  with  the  gov- 
ernment of  the  several  states,  and  one  with  another,  that  dur- 
ing the  present  war  they  will  co-ordinate  their  operations  in 
a  continental  railway  system,  merging,  during  such  period,  all 
their  merely  individual  and  competitive  activities  in  the  effort 
to  produce  a  maximum  of  national  transportation  efficiency." 

In  September,  191 7,  the  rule  was  put  into  effect  that  any  box  car 
when  unloaded  might  immediately  be  reloaded  for  movement  from 
any  railway  point  to  any  point  in  the  United  States,  regardless  of 
the  ownership  of  the  car.  This  is,  of  course,  nothing  more  or  less 
than  pooling  the  cars.  It  was  estimated  that  the  movement  of  freight 
cars  in  the  Chicago  District  would  be  expedited  15%  as  a  result,  and 
taking  the  country  as  a  whole,  in  effect  it  added  many  thousands  to 
the  number  of  cars  available  for  service. 

On  November  24,  19 17,  without  regard  to  the  prohibition  of  pool- 
ing contained  in  the  Interstate  Commerce  Act,  under  the  direction 
of  the  War  Board,  steps  were  taken  to  operate  the  railroads  north 
of  the  Ohio  and  Potomac,  and  east  of  the  Mississippi,  as  if  they 
were  one  line,  to  the  extent  of  pooling  their  tracks  and  terminals,  as 
well  as  their  cars  and  locomotives,  so  as  to  operate  them  as  a  single 
system  in  every  particular. 

By  the  action  of  the  Railroads'  War  Board  on  November  24th, 
1917,  65,000  miles  of  track  with  1,194,000  cars  and  677,000  em- 
ployees, were  operated  as  one  system  and  the  congestion  was  re- 
lieved by  diversion  and  routing  of  freight  so  as  to  use  all  facilities 
to  the  best  advantage.    It  was  obviously  impossible  for  justice  to  be 


—  14  — 

done  unless  the  earnings  of  these  properties  were  pooled  in  some 
way  as  the  railroads  which  carry  the  freight  will  make  money,  and 
the  railroads  which  carry  the  passengers  will  lose  it.  Obviously 
also  the  railroads  rendered  themselves  liable  for  not  obeying  the 
routing  instructions  of  shippers,  as  they  are  required  to  do  under 
the  Interstate  Commerce  Act. 

At  the  meeting  beginning  October  16,  1917,  of  the  National  As- 
sociation of  Railway  Commissioners,  its  President,  Hon.  Max  Thel- 
en  of  California  said  in  his  opening  address: 

"The  railroad  problem  in  the  United   States  has  perma- 
nently moved  beyond  the  ownership  and   operation   of  the 
railroads  as  disconnected  entities  by  private  companies.  The 
issue  now   and  hereafter  is   an   issue  between   consolidated 
operation  of  our  railroads  in  private  ownership  and  the  uni- 
fied operation   directly   by   the   people   through   government 
ownership.      National   exigency,   lofty   patriotism,    and   per- 
haps a  realization  that  government  operation  was  immedi- 
ately impending  unless  private  operation  met  the  emergency, 
prompted  the   railroads   of   the   United   States,   immediately 
after  the  declaration  of  war,  to  operate  as  a  single  consolid- 
ated American  system  and  in  doing  so  to  eliminate  a  por- 
tion of  the  waste  and  inefficiency  which  were  pointed  out  by 
the  Interstate  Commerce  Commission  in  the  five  per  cent, 
advance  rate  case  and  which  for  years  have  been  recognized 
and  commented  upon  by  state  railroad  commissioners  and 
other  students  of  raiload  problems.  But  what  is  now  being 
accomplished  is  only  a  small  part  of  what  must  be  done  if  our 
railroads  are  to  measure  up  to  our  new  standards  of  national 
efficiency." 
At  this  meeting  the  special  committee  on  public  ownership  and 
operation  of  the  National  Association  of  Railroad  Commissioners, 
after  commenting  upon  the  situation,  put  the  question  in  so  many 
words,  "Why  should  we  not  have  a  maximum  of  transportation 
efficiency  in  peace  as  well  as  in  war?" 

President  Rea  of  the  Pennsylvania  recently  stated : 

"No  less  than  2,385  separate  railroad  corporations  report 
to  the  Interstate  Commerce  Commission  and  I  hazard  the 
guess  that  at  least  2,300  of  them  could  be  merged  into  the 
bigger  systems  with  vast  benefit  to  the  public  and  everyone 
else  concerned." 
He  also  said  that  in  his  judgment  the  pooling  of  traffic  by  the  rail- 
roads is  essential  for  the  public  service  and  should  be  affirmatively 
legalized,  not  only  for  the  period  of  the  war,  but  for  all  time.    He 


_  I5  _ 

added  his  belief  that  the  restrictions  of  the  Sherman  law  should  not 
apply  to  the  railroads,  and  that  mergers  and  combinations  intended 
to  increase  efficiency,  simplify  accounting  and  eliminate  the  wastes 
of  competition,  should  not  only  be  countenanced  but  encouraged, 
under  public  supervision  and  control. 

The  Traffic  Director  of  the  United  States  Shipping  Board  in  Sep- 
tember, 191 7,  sent  a  memorandum  to  the  tug  owners  serving  the 
North  Atlantic  ports,  for  the  purpose  of  pooling  all  of  the  tugs  un- 
der one  control.  The  memorandum  indicated  the  possibility  of  an 
enormous  increase  of  efficiency,  if  the  operation  of  the  service  were 
delegated  to  a  single  head. 

The  Shipping  Board  on  September  27,  19 17,  approved  plans  for 
this  combination  of  New  England  coal  barges  and  ocean  going  tugs. 

A  peculiar  feature  of  the  last  annual  report  of  the  Interstate 
Commerce  Commission  is  that  they  again  renew  their  recommenda- 
tion to  Congress  that  under  the  Panama  Canal  Act  the  Commission 
be  empowered  to  permit,  subject  to  further  order  of  the  Commis- 
sion, continued  operation  by  a  railway,  or  under  railway  control,  of 
water  lines  or  vessels  where  it  will  be  in  the  interest  of  the  people 
and  of  convenience  to  the  public,  even  though  such  operation  may 
reduce  competition  on  the  route  by  water.  It  was  bad  enough  to 
have  to  ask  for  such  authority  at  all,  much  less  ask  for  it  twice. 

In  a  special  report  of  the  Interstate  Commerce  Commission  to  the 
Senate  and  House  of  Representatives,  dated  December  1,  1917,  the 
majority  of  the  Commission  suggested  as  an  alternative  to  Govern- 
ment operation  that  the  restrictions  of  the  anti-trust  laws,  and  of 
the  provision  of  the  Interstate  Commerce  Act  which  forbids  pool- 
ing, be  removed  for  the  duration  of  the  war.  Several  passages  of 
this  report  were  significant.  They  say,  speaking  of  competition  be- 
tween railroads : 

"Since  the  Hepburn  Act,  and  especially  since  the  Mann- 
Elkins  Act,  the  prescription  by  this  Commission  of  reasona- 
ble maximum  rates  and  charges  for  rail  carriers  subject  to  the 
Act,  and  the  exercise  of  its  power  to  require  abatement  of 
unjust  discrimination  or  undue  prejudice,  have  in  great  de- 
gree restricted  that  competition  to  the  field  of  service.  But 
whether  or  not  perpetuation  of  the  competitive  influence  is 
desirable  under  a  system  of  government  regulation,  etc." 

The  only  limitation  they  recommended  upon  the  suspension  of  the 
operation  of  the  anti-trust  laws  is  in  respect  to  consolidations  or 
mergers  of  parallel  and  competing  lines.  No  exception  is  recom- 
mended to  the  suspension  of  the  anti-pooling  provision  of  Section 


—  i6  — 

5  of  the  Interstate  Commerce  Act.  The  dissenting  opinion  of  Com- 
missioner McChord  recommended  that  the  railroads  be  taken  over  at 
once  by  the  Government,  acting  through  the  President,  under  au- 
thority of  the  Act  of  Congress  of  August  29,  1916,  and  in  the  event 
that  the  President  did  not  elect  to  take  over  the  railroads,  that  the 
regulation  the  railroad  operations  then  vested  in  the  several  agen- 
cies of  the  United  States  Government  should  be  promptly  centraliz- 
ed by  Act  of  Congress  under  a  single  governmental  administrative 
control.  Commissioner  McChord  pointed  out  that  the  diversified 
control  under  which  the  carriers  had  been  acting  since  the  war  had 
done  much  to  impede  the  movement  of  freight.  The  indiscriminate 
and  excessive  use  by  government  officials  of  directions  for  priori- 
ty of  movement  of  cars  had  in  fact  created  an  impossible  situation. 
The  break-down  of  the  existing  system  of  railroad  regulation  was 
at  hand. 

Apparently  the  storm  finally  broke  because  of  the  anti-pooling 
clause  of  the  Interstate  Commerce  Act.  In  President  Wilson's  state- 
ment to  the  Associated  Press  of  December  27,  19 17,  in  taking  over 
the  railroads,  he  says : 

''Complete  unity  of  administration  in  the  present  circum- 
stances involves  upon  occasion  and  at  many  points  a  serious 
dislocation  of  earnings,  and  the  committee   [referring  to  the 
Committee  of  Railway  Executives  who  had  been  co-operat- 
ing with  the  Government]  was,  of  course,  without  power  or 
authority  to  rearrange  charges  or  effect  proper  compensa- 
tion and  adjustments  of  earnings.     Several  roads  which  were 
willingly  and  with  admirable  public  spirit  accepting  the  or- 
ders of  the  Committee  have  already  suffered  from  these  cir- 
cumstances and  should  not  be  required  to  suffer  further." 
In  fact  the  railroads  were  bound  up   in  such  a   Gordian  knot 
of  bad  laws  that  the  President  had  to  wield  the  knife  like  another 
Alexander.    The  prospects  of  inducing  Congress  and  the  State  Leg- 
islatures to  repeal  these  laws  might  have  well  appalled  the  stoutest 
heart.     Too  many  political  careers  have  been  founded  upon  tying 
the  railroads  tight.    The  war  power  of  the  Government,  which  was 
found  equal  to  freeing  the  slave  without  paying  any  compensation 
to  his  master,  was  equal  to  seizing  all  the  railroads  of  the  country 
in  advance  of  any  arrangement  being  made  for  the  compensation 
of  the  owners.  The  spirit  of  the  President's  proclamation  and  state- 
ment breathes  the  highest  patriotism  and  justice,  and  Congress  has 
met  the  railroad  situation  with  a  very  creditable  statute.     But  if  the 
Director  General  of  Railroads  is  bound  to  obey  all  the  existing  rail- 
road laws,  and  in  this  connection  State  laws  and  orders  regulating 


—  ly  — 

intra-state  commerce  are  very  important,  the  railroads  might  almost 
as  well  be  given  back  to  their  owners.  Orders  have  already  been 
issued  to  disregard  the  routing  of  freight  by  shippers  whenever 
necessary,  and  already,  upon  the  request  of  the  Director  General, 
the  Interstate  Commerce  Commission  has  doubled  demurrage 
charges  for  not  unloading  cars — something  for  which  the  railroad 
companies  could  have  hardly  hoped  on  their  own  initiative.  May  we 
not  expect  that  necessary  increases  of  rates  long  denied  to  the  car- 
riers, will  now  be  granted  to  the  Government? 

At  the  time  of  our  recent  troubles  with  Mexico  the  country  wit- 
nessed the  breakdown,  for  lack  of  efficiency,  of  the  National  Guard 
system,  and  saw  the  necessity  for  unified  Federal  control  in  order 
to  get  an  efficient  army.  The  same  kind  of  a  situation  until  recently 
existed  in  the  American  railroad  world.  There  was  a  regular  army 
in  the  form  of  the  Interstate  Commerce  Commission  and  its  staff, 
and  a  National  Guard  in  each  State  in  the  form  of  a  State  Commis- 
sion, operating  independently.  Just  as  the  Nation  found  by  actual 
experience  that  it  was  necessary  to  have  a  unified  and  National  con- 
trol for  the  troops  of  the  United  States,  in  the  same  way  it  has  been 
shown  by  actual  experience  that  a  unified  National  control  is  neces- 
sary for  the  railroads.  It  is  more  than  a  generation  ago  that  experi- 
ence taught  that  there  should  be  a  unified  central  control  of  banking. 
Beginning  with  the  National  banking  system,  this  National  control 
has  been  strengthened  and  developed  until  we  now  have  the  Federal 
Reserve  Board.  Even  earlier  than  this,  the  shifting  of  control  of 
the  improvement  of  rivers  and  harbors  was  made  from  the  States 
to  the  Nation.  The  railroads  desire  nothing  more  than  that  the  Na- 
tion should  apply  to  them  the  same  unified  control  which  has  been 
found  necessary  in  so  many  other  instances. 

In  the  case  of  City  of  Montreal  v.  Montreal  Street  Railway,  A.  C. 
( 1912)  333,  it  was  held  by  the  English  Privy  Council  that  a  railway 
wholly  situated  in  one  Province,  and  which  had  not  been  declared 
by  the  Dominion  Parliament  to  be  a  work  for  the  general  advantage 
of  Canada,  remained  subject  to  the  regulation  of  the  Provincial 
Parliament  only.     Otherwise,  said  Lord  Atkinson, 

"the  line  itself  is  placed  in  this  unfortunate  position,  that  its 
local  traffic  is  put  under  the  jurisdiction  and  control  of  the 
provincial  Legislature  and  the  officials  of  the  local  Govern- 
ment, and  its  through  traffic,  with  all  these  other  matters,  is 
subjected  to  the  jurisdiction  and  control  of  the  Dominion 
Legislature  and  the  officials  of  the  Dominion  Government. 
A  most  unworkable  and  embarrassing  arrangement." 


It  is  interesting  to  observe  that  this  arrangement,  which  the  distin- 
guished Judge  declared  to  be  "most  unworkable  and  embarrassing" 
is  the  very  one  which  in  times  of  peace  exists  throughout  the  United 
States.  In  Canada  the  regulation  of  commerce  by  the  Dominion 
Government  is  not  subject  to  impediment  by  Provincial  authorities. 

The  total  number  of  regulating  authorities  in  the  United  States, 
exclusive  of  municipalities,  (which  frequently  become  very  impor- 
tant, as  for  example  when  they  require  the  removal  of  grade  cross- 
ings, or  electrification  of  tracks  within  city  limits),  is  96.  The  two 
Federal  agencies  are,  first,  Congress,  and  secondly,  the  Interstate 
Commerce  Commission,  while  the  94  State  agencies  are  48  State 
Legislatures  and  46  State  Commissions.  To  take,  for  example,  a 
railroad  system  which  is  not  one  of  the  largest,  the  Illinois  Central 
Railroad  Company  is  regulated  by  Congress,  the  Interstate  Com- 
merce Commission,  12  State  Legislatures  and  12  State  Railroad 
Commissions.  The  issue  of  its  securities  is  controlled  by  2  State 
Commissions,  whose  laws  do  not  agree  with  each  other,  while  the 
requirements  of  the  City  of  Chicago  in  the  matter  of  track  elevation 
and  electrification  make  its  City  Council  as  important  to  the  railroad 
system  as  a  whole  as  a  State  Legislature  or  Railroad  Commission 
would  be. 

As  an  illustration  of  the  intensely  local  spirit  in  which  State  Com- 
missions sometimes  deal  with  questions  of  national  importance,  in 
an  article  by  Mr.  T.  J.  Norton,  in  the  Traffic  World  of  August  11, 
191 7,12  he  says: 

"In  the  western  advance  case  of  191 5,  the  Interstate  Com- 
merce Commission  permitted  the  carriers  to  increase  the  min- 
imum load  of  flour  and  other  grain  products  moving  inter- 
state to  40,000  pounds  over  a  wide  extent  of  territory,  em- 
bracing most  of  fourteen  states  west  of  Indiana  and  the  Mis- 
sissippi River.  But  in  the  course  of  two  years  the  carriers 
have  been  able  to  get  that  minimum  of  40,000  granted  in  only 
one  state.  Just  a  few  days  ago  the  state  of  Kansas,  which 
has  compelled  the  carriers  to  haul  a  load  of  only  24,000 
pounds  of  flour  and  other  grain  products,  denied  their  appli- 
cation for  an  advance  to  what  the  Interstate  Commerce  Com- 
mission had  found  to  be  a  fair-sized  load,  notwithstanding 
that  it  appeared  in  the  western  advance  case  that  the  average 
equipment  would  carry  about  60.000  pounds  and  that  flour 
for  export  loads  from  70,000  to  85,000.     *     *     * 

11  Vol.    20.    D.    237. 


—  ig  — 

On  account  of  the  interference  with  interstate  commerce 
by  state  regulating  bodies  the  Atchison,  Topeka  &  Santa  Fe 
Railway  Company  last  year  employed  not  less  than  14,000 
cars  more  than  were  necessary  in  the  transportation  of  flour 
and  other  grain  products  alone.  A  like  stupendous  waste  for 
only  one  carrier  on  only  one  commodity  is  suffered  by  all 
carriers  as  to  grain  and  grain  products  and  also  as  to  other 
commodities  in  varying  degrees." 

In  December,  19 17,  the  Interstate  Commerce  Commission  was 
compelled  to  make  an  order  to  put  an  end  to  the  discrimination  pro- 
duced by  an  order  of  the  Public  Service  Commission  of  Missouri, 
creating  a  preference  in  favor  of  stock  yards  in  St.  Louis,  Missouri, 
over  those  in  East  St.  Louis,  Illinois,  on  shipments  of  cattle  origin- 
ating in  Missouri.13  Human  nature  is  the  great  constant,  and  the 
only  way  to  stop  wrong-doing  is  to  make  it  unprofitable. 

In  October,  1917,  the  Chamber  of  Commerce  of  the  United  States 
took  a  referendum  in  regard  to  the  subject  of  railroad  regulation. 
The  questions  submitted  by  the  Committee  and  the  result  of  the 
balloting  were  as  follows : 

I.      The  Committee  recommends  that  provision  be  made  for  fed- 
eral regulation  of  the  issuance  of  railroad  securities. 
iii2l/2  votes  in  favor. 
27^2  votes  opposed. 

II.      The  Committee  recommends  that  Congress  pass  a  general 
railroad  incorporation  law  under  which  all  railroad  car- 
riers subject  to  the  jurisdiction  of  the  Interstate  Commerce 
Commission  may  organize. 
iiny2  votes  in  favor. 
25/^  votes  opposed. 

III.  The  Committee  recommends  that  if  Congress  passes  a  rail- 
road incorporation  law,  all  railroad  carriers  subject  to  the 
jurisdiction  of  the  Interstate  Commerce  Commission,  both 
those  now  existing  and  those  hereafter  to  be  created,  be 
required  to  organize  under  this  law. 
1080^2  votes  in  favor. 
49^2  votes  opposed. 

13  Dimmitt-Candle-Smith  Live  Stock  Commission   Co.  v.  C.  B.  &  Q.  R.  R.   Co.  ct  ah, 
20  Traffic  World,  1259. 


—    20   — 

IV.  In  view  of  the  fact  that  conflict  has  arisen  with  respect  to  the 
jurisdiction  of  the  Interstate  Commerce  Commission  over 
intrastate  rates,  even  though  such  rates  affect  interstate 
commerce — the  Committee  recommends  that  the  Commis- 
sion be  given  authority  by  statute  to  regulate  intrastate 
rates  when  those  rates  affect  interstate  commerce. 
I054//2  votes  in  favor. 
66l/2  votes  opposed. 

It  has  been  estimated  recently  by  competent  authority  that  Amer- 
ican railroads,  which  consist  of  more  than  250,000  miles  of  single 
track,  represent  a  property  investment  of  about  $17,000,000,000, 
and  that,  either  directly  by  stock  ownership,  or  indirectly  through 
insurance  companies,  savings  banks,  charitable  institutions,  banks 
and  trust  companies,  half  the  people  of  the  United  States  are  inter- 
ested in  railroad  securities.  Investments  in  the  stocks  of  railroad 
companies  have  drifted  out  of  the  hands  of  magnates  into  those  of 
small  investors.  For  example,  nearly  half  the  stockholders  of  the 
New  Haven  do  not  hold  over  ten  shares  of  stock,  and  in  that  com- 
pany, as  in  the  Pennsylvania,  nearly  as  many  women  are  stockhold- 
ers as  men.  The  Pennsylvania  has  94,000  stockholders ;  the  Atch- 
ison 45,000;  the  Illinois  Central  10,000.  When  the  railroads  starve, 
many  people  go  hungry.  This  situation,  however,  makes  little  im- 
pression on  the  popular  mind,  for  the  things  which  are  seen  are 
politics  and  the  things  which  are  not  seen  are  economics. 

In  the  greater  portion  of  the  United  States  railroad  property  will 
always  receive  comparatively  bad  treatment,  because  it  is  owned  by 
non-residents.  It  is  a  matter  of  common  observation  that  the  taxes 
of  non-residents  are  always  higher  than  those  of  persons  who  are 
on  the  spot  and  able  to  take  care  of  themselves.  This  is  human  na- 
ture. Money  paid  to  railroad  companies  has  the  same  bad  aspect 
as  rent  sent  off  to  non-resident  owners.  The  clamor  and  outcry  of 
railroad  companies  against  injustice  in  most  localities  of  the  United 
States  is  like  that  of  a  man  situated  a  great  way  off,  and  whose 
voice  travels  slowly.  In  most  of  the  States  of  the  Country,  railroads 
are  to  all  intents  and  purposes  non-residents,  and  in  regulation  by 
such  States  they  are  treated  accordingly.  In  regulation  by  the  Nation 
as  a  whole,  however,  those  localities,  for  the  most  part  east  of  the 
Hudson  River,  where  railroad  stocks  are  largely  held,  have  also  a 
voice.  The  owners  of  the  railroads  are  not  non-residents  of  the  Na- 
tion as  a  whole.  For  this  reason,  if  for  no  other,  National  regu- 
latin  will  always  be  fairer  than  that  of  all  except  a  comparatively 
few  of  the  States,  and  the  quality  of  the  justice  administered  by  the 


—   21    — 

Nation  will  always  be  superior  to  that  administered  by  all  except  a 
comparatively  small  number  of  the  States,  so  far  as  railroad  com- 
panies are  concerned.  Constitutional  limitations,  whether  of  the 
State  or  of  the  Nation,  are  an  inadequate  protection  to  the  railroad 
industry.  The  growth  and  development  of  the  railroads  of  the  coun- 
try can  be,  indeed  it  now  is,  effectively  stopped  without  the  violation 
of  a  single  constitutional  limitation.  A  situation  where  one  who 
invests  new  capital  in  railroads  cannot  earn  more  than  the  rate  of 
interest,  but  may  lose  a  part  or  all  of  the  interest,  or  even  of  the 
principal  itself,  will  effectively  stop  the  building  of  additional  lines. 
The  only  protection  upon  which  the  railroads  can  really  count  is  the 
economic  law  that  people  will  not  invest  in  securities  which  do  not 
promise  a  safe  and  adequate  return.  We  have  now  reached  a  situa- 
tion in  this  country  when,  taking  the  railroads  as  a  whole,  they  have 
ceased  to  be  attractive  fields  for  the  investment  of  new  capital.  The 
people  of  the  United  States  ought  to  be  concerned  about  this  situa- 
tion. There  are  only  two  remedies  for  it,  either  the  railroads  must 
be  allowed  to  earn  enough  to  keep  attracting  the  capital  necessary 
for  the  development  of  the  business,  or  the  Government  itself  must 
build  the  additional  railroads  and  facilities  which  the  growth  of  the 
country  and  of  its  business  require.  Indeed,  since  the  President 
took  over  the  railroads  at  the  close  of  1917,  only  the  latter  alterna- 
tive remains,  for  the  present.  It  is  clear  as  never  before  that  the  in- 
terests of  the  whole  people  require  that  the  railroad  industry  should 
be  placed  permanently  upon  a  prosperous  basis,  not  only  during  the 
present  war  but  after. 

The  conclusion  of  the  whole  matter  is  that  such  things  as  experi- 
ence during  the  war  has  shown  to  be  for  the  benefit  of  the  public 
as  well  as  of  the  railroad  companies  should  be  lawful  when  the  war 
is  over;  that  the  public  should  not  be  deprived  of  the  advantages 
which  have  been  made  manifest  by  unification  for  service  of  the 
railroads  of  the  country ;  and  that  such  statutes  as  forbid  the  con- 
tinuance of  an  arrangement  so  excellent  and  so  sensible  from  every 
point  of  view,  should  be  repealed  or  modified  so  as  to  permit  a  con- 
tinuance of  present  conditions,  so  far  as  they  are  of  advantage  to 
the  people  as  a  whole. 

One  of  the  greatest  dangers  of  the  present  situation  is  that  while 
the  Government  is  in  control  of  the  railroads  without  a  fully  corre- 
sponding increase  of  rates,  it  will  raise  the  wages  of  labor  to  such 
an  extent  that  their  owners  cannot  afford  to  operate  them  upon  the 
conditions  which  will  exist  at  the  close  of  the  war.  In  England  it  is 
estimated  that  the  increased  wages  paid  to  labor  alone  will  wipe  out 


all  the  profits  of  the  railroad  companies  upon  the  basis  of  earnings 
now  existing.1*  The  English  Government  has  raised  the  rates  very 
little,  and  the  enormous  burden  of  increased  operating  expenses  has 
fallen  upon  the  English  people  in  taxes.  If  such  a  condition  should 
arise  here,  the  owners  of  the  properties  would  find  themselves  ruin- 
ed in  advance,  when  they  took  their  properties  back,  for  they  could 
count  upon  the  fierce  resistance  of  the  shippers  to  any  increase  of 
rates,  and  the  sympathy  of  the  regulating  bodies  with  the  shippers 
in  that  position.  And  who  will  reduce  wages?  Without  an  adequate 
increase  of  rates,  private  ownership  is  a  ruinous  program. 

In  "China:  An  Interpretation,"  written  several  years  ago  by 
James  W.  Bashford,  Bishop  of  the  Methodist  Episcopal  Church 
resident  in  China1"'  occurs  the  following  passage : 

"May  9,  191 1,  the  government  proclaimed  its  policy  for  the 
nationalization  of  the  railways  of  China.  An  illustration  of 
the  irony  of  history  is  found  in  the  fact  that  in  the  technical 
struggle  over  which  the  revolution  finally  broke,  Prince  Chun 
was  in  the  right  and  the  liberals  were  in  the  wrong.  This 
technical  struggle  was  over  the  question  whether  the  railways 
should  be  under  the  control  of  the  central  government  or  un- 
der the  control  of  the  various  provincial  governments.  Prince 
Chun  stood  for  a  national  ideal  as  over  against  the  ideal  of 
provincial  supremacy,  while  the  provincial  authorities,  suf- 
fering from  the  despotism  of  preceding  centuries,  struggled 
for  provincial  control.  Every  American  can  see  how  danger- 
ous, especially  in  time  of  war,  would  be  forty-eight  systems 
of  American  railways,  each  under  a  state,  rather  than  under 
national  control.  Surely,  if  China  is  to  protect  herself 
against  foreign  aggression,  she  must  have,  as  speedily  as  pos- 
sible, a  system  of  railways  extending  throughout  the  nation 
and  under  national  control,  by  which  she  can  move  her  troops 
quickly  to  any  point  where  danger  threatens.  The  whole  po- 
litical history  of  the  nineteenth  century  may  be  summed  up 
in  a  movement  toward  nationalism  as  over  against  state 
rights,  or  the  rights  of  petty  independent  kingdoms.  In  this 
last  struggle  Prince  Chun  placed  himself  in  line  with  great 
statesmen  of  the  modern  world." 

President  Wilson  has  also  placed  himself  in  line.  The  situation 
at  this  hour  is  full  of  hope.     It  is  not  beyond  the  reach  of  human 

14  See  article,  "The  Railways  of  Great  Britain  After  the  War,"  64  Railway  Age,   160, 
taken  from  The  Engineer,  London.  November   -?o,   191 7. 

15  PafifP    3X7    nnfp. 


—  23  — 

possibility  that  the  actual  demonstration  of  the  advantage  of  com- 
bination instead  of  competition,  will  lead  to  a  change  of  the  entire 
policy  of  the  American  people  towards  the  railroads. 

The  Act  of  Congress  of  March  21,  1918,  in  making  provision  by 
Section  10  that  during  the  period  of  Federal  control,  whenever  in 
his  opinion  the  public  interest  requires,  the  President  may  initiate 
rates,  fares,  charges,  classifications,  regulations  and  practices,  by 
filing  the  same  with  the  Interstate  Commerce  Commission,  provid- 
ing further  that  the  Commission  shall  have  no  power  to  suspend 
them,  pending  final  determination,  but  that  the  Interstate  Commerce 
Commission  shall,  upon  complaint,  enter  upon  a  hearing  concerning 
the  justness  and  reasonableness  of  the  order,  expressly  provides : 

"In  determining  any  question  concerning  such  rates,  fares, 
charges,  classifications,  regulations,  or  practices  or  changes 
therein,  the  Interstate  Commerce  Commission  shall  give  due 
consideration  to  the  fact  that  the  transportation  systems  are 
being  operated  under  a  unified  and  coordinated  national  con- 
trol and  not  in  competition." 

It  is  interesting  to  observe  that  the  powers  of  the  President  are 
not  restricted  to  interstate  rates,  and  that  either  the  Interstate  Com- 
merce Commission  is  granted  the  power  to  review  intrastate  rates 
initiated  by  the  President,  or  there  is  no  provision  made  to  review 
such  intrastate  rates  at  all.  There  is  no  constitutional  difficulty  in 
power  being  conferred  upon  the  Interstate  Commerce  Commission 
to  review  intrastate  rates,  whether  such  legislation  be  based  upon 
the  war  power  or  upon  the  power  to  regulate  foreign  and  interstate 
commerce. 

"If  the  situation  has  become  such,  by  reason  of  the  inter- 
blending  of  the  interstate  and  intrastate  operations  of  inter- 
state carriers,  that  adequate  regulation  of  their  interstate 
rates  cannot  be  maintained  without  imposing  requirements 
with  respect  to  their  intrastate  rates  which  substantially  affect 
the  former,  it  is  for  Congress  to  determine,  within  the  limits 
of  its  constitutional  authority  over  interstate  commerce  and 
its  instruments  the  measure  of  regulation  it  should  apply."16 

The  effect  of  combination  of  railroads  under  the  rule  of  the  Di- 
rector General  has  shown  itself  at  once  in  a  remarkable  series  of  re- 

w Simpson  v.  Shepard,  (1913),  230  U.  S.  352,  432-3. 


—  24  — 

forms.  Ports,  terminals,  locomotives,  rolling  stock  and  other  trans- 
portation facilities,  have  been  utilized  without  regard  to  ownership ; 
the  designation  of  routes  by  shippers  has  been  disregarded  in  the 
public  interest ;  new  through  routes  for  traffic  have  been  establish- 
ed ;  traffic  agreements  have  not  been  allowed  to  interfere  with  expe- 
dition. Demurrage  charges  have  been  increased  upon  cars  so  as  to 
minimize  their  detention  for  loading  and  unloading;  new  construc- 
tion has  been  limited  to  the  minimum  required  by  National  necessi- 
ties ;  ticket  offices  have  been  consolidated ;  advertising  and  solicita- 
tion of  traffic  have  been  discontinued;  the  amount  of  free  trans- 
portation has  been  reduced ;  the  use  of  universal  inter-line  way-bill- 
ing and  standard  forms  has  been  introduced;  an  uniform  rule  has 
been  established  in  regard  to  the  construction  of  new  industry 
tracks ;  an  order  has  been  made  that  suits  against  carriers  while  un- 
der Federal  control  must  be  brought  in  the  County  or  District  where 
the  plaintiff  resides,  or  in  the  County  or  District  where  the  cause  of 
action  arose,  otherwise  it  is  expected  that  no  provision  will  be  made 
by  the  Government  for  satisfying  judgments  obtained  in  such  suits. 
The  lines  of  steamships  serving  the  Atlantic  Coast  have  also  been 
taken  over  by  the  Director  General  and  are  expected  to  be  operated 
in  connection  with  the  railroads.  Arrangements  have  been  made  to 
unify  the  purchase  of  materials  and  supplies  for  all  the  railroads  by 
the  Government.  The  Government  has  under  consideration  the  dis- 
continuance of  fire  insurance,  the  Government  itself  bearing  the 
risk.  An  increase  of  rates  has  been  granted  in  Trunk  Line  terri- 
tory, and  further  increases  of  rates  in  other  parts  of  the  country  are 
expected ;  it  is  believed  that  the  attitude  of  the  Interstate  Commerce 
Commission  will  be  more  favorable  to  such  increases  than  hereto- 
fore. Superfluous  passenger  trains  have  been  eliminated  and  their 
schedules  arranged  so  as  to  accommodate  the  passengers  better  in 
the  choice  of  time  of  departure,  and  further  improvements  along 
these  lines  are  in  contemplation.  The  designs  for  locomotives  and 
cars  have  been  standardized.  The  three  different  classifications  used 
in  freight  service  in  different  parts  of  the  country  are  expected  to  be 
harmonized  at  an  early  day.  Unnecessary  associations  of  carriers 
are  in  the  process  of  being  abolished.  An  end  is  to  be  made  to  the 
cross-hauling  of  coal,  by  compelling  the  shippers  to  buy  from  min- 
ers in  their  own  field.  In  short,  the  Director  General  is  earnestly 
endeavoring  to  secure  the  economies  of  combination,  and  is  making 
considerable  progress. 

Can  it  be  believed  that  the  American  people  will  ever  return  to  the 
regime  of  enforced  competition  of  carriers,  or  even  consent  to  the 


—  25  — 

conduct  of  the  railroad  business  on  a  competitive  basis?  This  does 
not  necessarily  mean  Government  ownership,17  but  it  means  at  least 
a  sweeping  reform  in  the  system  of  railroad  regulation  which  pre- 
vailed before  the  President's  Proclamation  of  December  26,  191 7. 

Blewett  Lee. 
Chicago. 

17  A  concise  discussion  of  "What  Government  Ownership  Would  Mean,"  by  Mr. 
Samuel  O.  Dunn,  will  be  found  in  Volume  64.  No.  14,  page  831,  of  the  "Railway  Age". 
Mr.  Dunn  concludes  that  after  the  war,  private  ownership  under  a  more  rational  system 
of  regulation  would  be  better  than  government  ownership,  but  "to  return  the  railways 
to  their  owners  after  the  war  subject  to  the  kind  of  regulation  which  has  prevailed  would 
be  disasterous  to  both  the  companies  and  the  country."  In  this  article  Mr.  Dunn  ques- 
tions the  expediency  of  the  President's  having  assumed  such  complete  control  of  operation 
of  the  railroads.  The  legality  of  the  President's  Proclamation  of  December  26,  1917, 
is  questioned  by  District  Judge  Evans  in  Muir  v.  L.  &  N.  R.  R.  Co.  (March  2,  1918),  247 
Fed.  888.  The  Act  of  Congress  of  March  21,  1918,  entitled  "An  act  to  provide  for  the 
operation  of  transportation  systems  while  under  Federal  Control,  for  the  just  compensa- 
tion of  their  owners  and  for  other  purposes"  would  however  be  very  curative. 


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PEB  17    193 
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1 


LD  21-100m-7,'33 

THE  ANN  ARaf 


YD  237i 


Gay  lord  Bros. 

Makers 

Syracuse,  N.  V. 

PAT.  JAN.  21,  1908 


381922 


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